Cash Credit are loans that are extended to companies to fund their working capital requirements. Cash-strapped businesses find it tough to carry on their day-to-day operations, and they end up with massive debts or the worst-case scenario, closure. Banks and other lending institutions offer several short- and long-term loans and financing (cash credit) to help businesses meet their liquidity needs.
Cash credit is a working capital loan that businesses can take out. It is the credit given to organisations for some time above their current account balance. Businesses can borrow up to the agreed or authorised borrowing limit over and above their account balance. The bank would charge interest only on the amounts withdrawn, not the whole borrowing limit, according to its norms and agreed agreements between the borrower and the lender.
Numerous factors decide the borrower’s borrowing limit:
A cash credit facility is a type of short-term loan. As a result, cash credit must reflect on the liabilities side of the balance sheet under the heading Short Term Loans, as per the accounting rules and Accounting Standards guiding the preparation of the books of accounts and financial statements.
Suppose Company A is a phone manufacturer that owns and operates a facility where it spends money on raw materials before turning them into completed goods. In contrast, finished goods inventory does not get sold immediately. The company’s capital gets trapped in stock. Company A accepts a cash credit loan in order to pay its expenses. This is done while it waits for its finished goods inventory to convert into cash, allowing it to continue operating without a shortfall.
Cash credit is credit extended to a person more than the amount available in their account, with interest charged on the cash borrowed. Any of the following people are qualified to take advantage of this service.
The KYC documents, as well as a few additional documents that determine the nature and sustainability of the firm, are necessary to use this service. Below is a list of documents.
The ability to use cash credit is a great help to businesses. The following are some of the advantages that this facility provides to enterprises.
Cash credit facilities, while considered to be a helpful and advantageous form of lending for borrowers, may have some drawbacks, which are listed below:
The Cash Credit must be kept distinct from the other accounts and always show a credit balance.
Cash credit is a short-term business loan provided to organisations to maintain working capital, and overdraft facilities are for individuals and businesses who want to withdraw more than their available funds in their bank accounts.
A few differences between overdraft and cash credit are as below:
|Cash credit is a short-term loan granted to firms by banks or financial organisations to keep their working capital afloat.||An overdraft facility is a loan to an individual or a business depending upon their banking relationship. In this arrangement, an individual can withdraw an amount more than his available balance up to a pre-decided limit set by the bank, as long as the bank’s laws get followed.|
|Provision for cash credit is for maintaining the working capital of the business.||Provision for Over draft is for meeting short-term obligations of individuals or businesses.|
|Rate of Interest|
|The borrowing rate is lower than the interest rate on an overdraft.||The interest rate is higher than the cash credit.|
|Need of account|
|The creation of a new account is compulsory.||An existing account is sufficient to obtain an overdraft.|
|Calculation of Interest|
|Interest is calculated based on the entire amount that is withdrawn||Calculation of Interest is only on the amount that gets availed|
|Duration of loan|
|The duration of the loan is generally one year.||The loan term can be monthly, quarterly, half-yearly, or yearly.|
Cash credit is a short-term loan offered by banks or financial institutions to firms to keep their working capital afloat. A borrower is granted a cash credit facility for a period of 12 months at a time. The interest imposed on a cash credit facility is not on the total amount of the borrowing limit, which makes it a better option than standard business term loans. It only gets applied to the amount borrowed throughout the loan’s term. The cash credit facility has a reasonably flexible payback plan.
Ans: A Cash Credit is a credit limit given to debtors. Borrowers can withdraw funds several times during the term until they do not exceed the CC limit.
Ans: Borrowers get a cash credit facility for 12 months, which can get renewed at the end of the term.
Ans: A cash credit facility’s interest is calculated solely on the amount withdrawn (the account’s daily closing balance), not the overall borrowing limit available to the borrower.
Ans: Cash credit is a short-term loan that one can classify as the borrower’s current liabilities.
Ans: Inventory or stocks, debtors, or any other current assets, as well as fixed assets in some situations, can be used as security for a cash credit facility. Collateral for non-manufacturing firms can be any asset agreed upon by the lender and the borrower.
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